By Adam Hirsch
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It used to be so simple.
Once upon a time, there was a plaintiff and a defendant.
Each one hired counsel. The plaintiff filed a complaint, and the claims were litigated. Maybe the plaintiff’s lawyer charged hourly; maybe she took the case on a contingent basis. Maybe the defendant had insurance coverage to pay for its lawyers; maybe not.
Either way, the economics of litigation remained blissfully in the background.
Not anymore. Litigation finance has become big business. Risk spreading is not just for defendants and insurance companies anymore—private equity firms sprouted up to evaluate and invest in litigation claims as assets.
Nowadays, litigation finance draws headlines. These are, primarily, for the big-ticket financing of multimillion dollar claims. But as the industry matured, it expanded.
For example: If there’s money to be made by investing $50 million into a class action, there may also be money to be made by investing $5,000 in a claim brought by the victim of a motor vehicle accident.
Law Cash certainly thinks so. Its website touts it as “The Nation’s Premier Pre-Settlement Funding Company,” and it offers, among other services, to provide plaintiffs with cash in exchange for Law Cash receiving a portion of any recovery from that plaintiff’s litigation.
The idea is that a plaintiff struggling to make rent will be more likely to settle his claim quickly and cheaply. A plaintiff-funded by Law Cash, on the other hand, can stick with his case and pursue a more favorable outcome.
These payments by Law Cash to plaintiffs are not intended to be loans; if the plaintiff loses his case Law Cash does not get paid back.
Which would be all well and good if the plaintiff was a real person with real rent obligations who was pursuing a real claim based on a real car accident. In a recent lawsuit, Law Cash alleges that a law firm (and others) defrauded it by applying for and obtaining over $100,000 in financing for a group of plaintiffs who Law Cash alleges do not exist.
In other words, a firm that funds litigation hired a law firm to litigate fraud claims against a different law firm relating to litigation. That law firm is represented in that litigation by yet another law firm.
Law Cash’s claims, at least, are straightforward. It alleges that the defendant law firm’s office manager arranged for payments of $5,000 or $6,000 to 19 of the firm’s supposed clients.
Per Law Cash’s complaint, one of the lawyers at the defendant law firm discovered correspondence with Law Cash but did not recognize the client names being discussed. He contacted Law Cash, who then undertook its own investigation and concluded that these supposed clients did not exist. They had been manufactured on paper for the purpose of defrauding Law Cash.
Among other indicia of fraud, Law Cash alleges that the same notary had notarized the signatures of each of the nonexistent plaintiffs. It also claimed that the police reports of the alleged accidents did not follow the standard formatting used by the local sheriff’s department.
Law Cash then tried to contact the nonexistent plaintiffs, with no response. Two months later, it learned that a criminal case had been filed in which Law Cash was identified as a victim.
Two months later, in January 2017, it filed suit, bringing common law fraud and RICO claims, among others.
Law Cash’s lawsuit shows that litigation financiers, like lawyers, are not immune from being defrauded.
Any time there’s a cash transaction—particularly one executed at a distance—there’s fraud risk.
By necessity, the underwriting of a $5,000 litigation advance is less intense than a $50 million investment in a class action. Per its complaint, Law Cash says it asked for each plaintiff’s medical records, the police accident report, insurance information, a copy of the plaintiff’s driver’s license and a copy of the complaint if it’s already been filed. It also asks for the plaintiff’s DOB, SSN, the date of the accident and whether other financing has already been provided.
For four-digit transactions like those described in Law Cash’s lawsuit, one wonders if additional underwriting steps could have been reasonably taken (or would have been cost-justified). It doesn’t seem like good business to spend $10,000 underwriting a $5,000 payment that has a 50% chance of returning $25,000 on a favorable verdict or settlement.
And yet, if Law Cash’s complaint is taken as true, a determined fraudster (or fraudsters) was able to devise a scheme that took over $100,000 from that company.
We’ll keep track of the case to see whether and how Law Cash’s underwriting procedures are litigated, and to see what other defenses the defendants may offer.
We will also return to litigation finance as a subject from a different angle again soon.
This website and its contributors are not providing legal advice and this website does not create an attorney-client relationship. If you need legal advice, please contact an attorney directly.
— Adam Hirsch has practiced law in Chicago for more than 15 years, with a regular focus on commercial litigation.
After graduating from Harvard Law School in 2001, he began his legal career at Jenner & Block, LLP. For the last 11 years, he has practiced at Robinson, Curley & Clayton, P.C., a Chicago litigation boutique that has practices in commercial, receivership, and employment litigation, and employment counseling.
His practice is focused on business and investment disputes, in particular, claims brought by investors relating to unregulated securities, limited partnerships, and private equity investments.